By Stuart Burns
While it may be a bit far-fetched to suggest General Motors (NYSE:GM), Ford (NYSE:F) or Volkswagen (OTCPK:VLKAY) are making all of their money in China, the world’s largest car market is certainly the most lucrative for all the major Western auto companies with joint ventures in the country.
According to a Financial Times article, in the first quarter of this year, GM’s China joint ventures reported net income of $595 million, compared to just $100 m for the company’s global operations which have been hampered by a $1.3 billion charge for its recall crisis and another $400 m loss related to its Venezuelan operations.
The top foreign automaker in China, VW, said Chinese sales accounted for 31% of the company’s total sales last year, with its joint ventures in the country reporting operating profits of €9.6 b compared to €11.7 b for VW worldwide. Foreign automakers are in something of a sweet spot with a rapidly rising middle class creating considerable demand for quality products in spite of a slowing Chinese economy.
Last year saw a 16% rise in sales to 18 m units. From January to May, the market grew a further 11% with May, alone, chipping in 8.5% growth over the same month last year.
Not surprisingly, plants are running flat out according to the FT, quoting Macquarie estimates that the average capacity utilization rate of foreign-invested car factories has been running at 100% or higher since 2010.
Full capacity is generally calculated on the basis of two eight-hour shifts five days a week, or 80 hours per week. GM and Ford’s joint ventures, with SAIC (NYSE:SAIC) and Changan (OTC:CQCAF) respectively, are expected to lay on extra shifts to boost capacity utilization to more than 120% this year as Ford’s Focus becomes China’s best selling car with 30% sales growth year-over-year last month.
Both foreign carmakers and their domestic joint-venture partners are earning handsomely from the situation. Apart from booming car sales, multinational car companies also collect technology and brand royalty from their China joint venture customers, and make additional money from selling components to them. The Chinese joint venture partners are making so much money some of them are investing in their foreign partners. Loss-making Peugeot is almost uniquely making money in its Chinese JV with its partner Dongfeng using the proceeds to make an €800 m investment in the French carmaker taking a 14% stake.
Domestic automakers have not fared so well by comparison with sales growth of just 5.4%. China’s most popular domestic brands, BYD and Chang’an, each sold just 500,000 units during the whole of 2013 across all their models and makes. Not surprisingly, those domestic automakers without foreign JVs are complaining loudly. The China Association of Automobile Manufacturers (CAAM), a domestic lobbying group, is encouraging Beijing to conduct a review of anti-competitive behavior in the auto markets as part of a wider drive to ensure foreign brands are not acquiring market share at the expense of domestic brands across a range of industries including pharmaceuticals and alcohol in addition to automobiles.
CAAM is trying to block moves to allow foreign automakers to raise their stake in joint ventures above the current 50% ceiling.
How much longer the gravy train will continue remains to be seen. Rising scrutiny from Beijing may force changes on the nature of the relationship between foreign and domestic partners but the strength of demand for the vehicles they produce seems set to remain strong for the foreseeable future, suggesting firms may be able to ride out any changes and continue to reap the rewards. Good news for GM, Ford, VW and others, and in particular their supply chains that have continued to see growth even as mature north American and European markets have managed only modest growth.
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